THE MOBILE DEBT TRAP: The Lion waiting to Pounce on its Prey
Mukasa is a small holder farmer in Luwero, a district in Central Uganda. Mucks and his family of 7 live off his one acre maize farm. He is a subsistence farmer who mainly grows maize to feed his household. Out of the 20 sacks of maize harvested from his farm, Mukasa only sells 2 sacks at the local market. From these two sacks, He gets an average income of UGX 120,000 (US$ 35) per month.However, Mukasa does not have a regular and stable income due to the uncertainties associated with subsistence agriculture.
During bumper harvests, the maize prices drop to such levels that Mukasa can barely meet the non-consumption household needs such as education and health. In periods of drought the situation becomes even more dire as Mukasa must rely on food stumps from government to keep his household alive.
Such living conditions rendersMukasa’s household very vulnerable to unexpected events like a drop in the demand for his maize produce. Saving with a financial institution would enableMukasa access credit in difficult times to meet shortfalls in his income. Apart from the secret place in his bedroom, Mukasa does not have access to other more reliable savings channels. Mukasa cannot borrow against his savings in the secret place but rather spend within his means.
This was Mukasa’s story before the Mpewotel set up a mobile money agent in his village. Although Mukasa was a subscriber of Mpewotel, up to that time he had only used his mobile phone for just calling his son in the city. The promoters of Mpewotel Mobile Money had come with the village chairman who had persuaded him to keep his savings on his phone rather than in the secret place. For every UGX 1000 Mukasa saved on his phone, he would earn UGX 60 per year but he would also be able to borrow UGX1000 at a cost of UGX 90 per month.
The credit from Mukasa’s phone came in handy to meet his household needs during times when he was short of money. However, this credit option was increasingly becoming a burden because it was beginning to accumulate to levels he could not be able to manage. The unstable income flows of Mukasa meant that some months when he was short of cash he would default in his loan payments. If these periods became regular as was often the case, the outstanding loan balances kept on accumulating.
Mukasa found himself in a debt trap where he was borrowing to pay back and stood losing access this credit facility. Persistent defaults would also mean that Mukasa would not have access to any other credit facility from a formal financial institution until he paid up his outstanding loan balances.
Mukasa’s story is not isolated, many low-income individuals accessing mobile credit have found themselves trapped in debt unable to meet their debt obligations. Two years ago, media reports inKenya showed that Commercial Bank of Africa had blacklisted 140,000 loan defaulters. These would have consistently defaulted on their loan payments for3 months before being blacklisted. Being blacklisted would bar them from accessing credit for 5 years unless they paid up their outstanding loans.
This debt trap for borrowers likeMukasa is most likely caused by the following four factors combined;
- The high interest rates on these small loans. In event of persistent loan defaults, the outstanding loan can quickly accumulate to levels the borrower cannot manage
- The short loan payment periods which makes the payment instalments larger in relation to the borrower’s income
- The irregular income flows of such borrowers which increase the risk of default when the loan payments are due
- Most of the loans are taken out to meet consumption needs which increases the risk of default in face of irregular or no income from activities rather than agriculture.
A recent report on the performance of the Mshwari mobile savings and credit product puts the non-performing loans at 2 out every 100 loans disbursed. This is very good performance but it does not minimise the importance of paying attention to the potential dangers of credit to the low-income individual. In my next blog, I am going to suggest some of the things that can be done to avoid the mobile debt trap.
By: Joseph Lutwama,Former Policy, Legal &Regulatory Specialist FSD Uganda, Currently the FSD Uganda Director of Programs